Mastering the Basics: Understanding Private Equity Fundamentals
Private equity is an investment type that has been gaining in popularity over the years due to its potential for high returns. Private equity funds (PE funds) involve purchasing ownership in private companies and then selling them after a few years for a profit. This article will explain the fundamentals of private equity funds, including how they work, the types of investments they make, and the risks involved.
How Private Equity Funds Work
Private equity funds are typically formed by institutional or high net worth investors who want to put their money to work. The PE fund managers then use the money to purchase ownership stakes in private companies. The goal is to grow these companies and then sell them for a profit. The PE fund earns money by taking a percentage of the profits.
Types of Investments Private Equity Funds Make
Private equity funds invest in all types of private companies, ranging from startups to established businesses. They may also invest in companies across different industries, such as technology, healthcare, and financial services.
PE funds typically invest in companies that are not publicly traded, which means they cannot be bought or sold on a stock exchange. This is why private equity investments are often considered higher risk than traditional public investments, such as stocks and bonds.
Risks Associated with Private Equity Funds
Investing in private equity funds involves a significant amount of risk. This is because private equity firms use the invested money to buy ownership stakes in private companies, which are often unproven, and may have a high potential for failure.
Another risk of private equity funds is that your money may be tied up for a long period of time. Unlike traditional public investments, private equity investments typically require a minimum holding period of several years.
Examples of Successful Private Equity Investments
Despite the risks, private equity funds can deliver significant profits. One example of a successful private equity investment is the acquisition of Skype by private equity firm, Silver Lake, for $2.5 billion in 2009. In 2011, Skype was sold to Microsoft for $8.5 billion, earning Silver Lake a huge profit.
Another example is the private equity acquisition of Hertz in 2005 by a group of investors, including Clayton, Dubilier & Rice and The Carlyle Group. Hertz was sold to another private equity firm, The Carlyle Group, for $2.3 billion in 2013, earning the investors a healthy return on their investment.
Conclusion
In conclusion, private equity funds can be a lucrative investment option, but they are not without risk. Investors should do their due diligence before investing and understand the risks involved. When selecting a private equity fund, it’s important to consider the fund manager’s track record, investment strategy, and fees. By understanding the fundamentals of private equity funds, investors can make more informed investment decisions.
